$8,000 Tax Credit’s Hoops Frustrate House Hunters

RISMEDIA, October 16, 2009—(MCT)—This summer, Brian Smith decided he should buy a house. Prices were at record lows; “for sale” signs were common, and, most important, he could get a tax credit of as much as $8,000 for first-time buyers if he bought before December. But four months later, after looking at more than 40 houses and condominiums, Smith quit his search in frustration.

“Honestly, my heart was so broken,” said Smith, an associate at a financial-investment company. “I hate that I am going to miss out on the tax credit. But it’s better to wait and get the place you need and want than to get a place and not be happy with it.”

As the Nov. 30 deadline nears for the first-time home buyer tax credit, no hard numbers suggest how many buyers are in Smith’s position. But interviews with real estate agents, lenders and buyers suggest that the number of first-time buyers who are encountering challenges is rising.

At least some are learning they must play by a whole new set of rules from just a few years ago. Stung by a real estate meltdown fueled with free-flowing mortgages and runaway prices, regulators have reacted to the downturn by forcing lenders to be stingier with loans.

Buyers in Orlando, one of the hardest-hit markets in the country, must compete with multiple offers on bargain properties. Short sales can take months to finalize. Foreclosed houses often need repairs that disqualify them from federally backed mortgages. And, amid the free-falling prices, deal-killing appraisals often fall short of sales prices.

Smith found monthly fees on the condos he was interested in would have cost more than mortgage payments. He endured a trail of “junk” houses that needed new roofs and other repairs. Some of the foreclosed properties had no power, and he had to view them by flashlight or cell phone light. And finally, the four-bedroom pool home he wanted the most failed to meet federal lending rules.

“In a nutshell, it’s a whole different world out there,” said Judi Northrop, the Equilliance LLC loan officer who worked with Smith. She said he was a great candidate for a mortgage, but the days of someone with a pretty credit score skating through the process are over. Now lenders want documents to address every note in a mortgage application.

The real estate industry continues to hope that the tax incentive will revive the sagging market. A study released earlier this month by the Fisher Center for Real Estate and Urban Economics at the University of California showed the credit has spurred sales. The supply of homes priced at less than $300,000 decreased by 26% compared with a year ago; and the amount of homes priced within the $300,000 to $500,000 range dropped by only 18%. Study author Kenneth T. Rosen, lead researcher on the study and Chairman of Rosen Consulting Group, credited the federal tax break.

In the Orlando area, it’s not clear how many first-time buyers are hitting snags while investors and others scoop up bargains. Though sales overall for the year are up 45% from last year, the percentage of home sales with prices from $300,000 to $500,000 grew more during the last year than home sales under $300,000, according to a review of data from the Orlando Regional Realtor Association. Investors are definitely making their mark, said Les Simmonds, president of the association. “Multiple offers are there because investors are getting back in the market,” Simmonds said. “Traditional buyers coming in are going to find they’re in that mix with those bids. The frustration is understandable.”

Until the tax credit emerged, buying a home had not been on Smith’s to-do list for a long time. In 2002, he considered purchasing a house but “chickened out” after declines in the stock market. For years, he rented from a roommate. Smith, who was earning $39,000 at his job in Maitland when he started his search, targeted homes priced at $100,000—about $28,000 less than the area’s median price. His loan officer said he could have afforded more, but he wanted to play it safe. Early in his hunt, he found a real estate landscape defined by foreclosures and distressed properties, which constitute about half of the sales in the Orlando market. Of the 20 houses or condos he had seen by June, only two had people still living in them.

Northrop recalled that one of the houses Smith zeroed in on was in such rough shape that the drywall was missing in some places and only the studs showed after owners did not complete a renovation. Smith was getting a Federal Housing Administration-backed loan because those mortgages require down payments of only about 3%, compared with 10% or 20% for conventional loans. Those loans also require solid houses instead of makeover candidates.

Troubled house hunts aren’t unique to Smith. Orlando resident Darby Miller said he has found the market so competitive that one house had 12 offers by the time he looked at it. The biggest problem, he said, was that he did not qualify for a state program that would have given him the $8,000 tax credit money upfront to use as a down payment. “At this point, it’s very inconvenient,” Miller said. “I’m going to have to draw from funds I didn’t really want to use.” For Smith, any condos and houses that were in his price range and in good condition quickly disappeared from the bargaining table. Two months into his search, Smith had made no offers. “By the time I’ve said I’m interested, they’re gone,” he said. “Someone got to them before me.”

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